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Portland Products is considering the purchase of one of three mutually exclusive projects for increasing production efficiency.

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Portland Products is considering the purchase of one of three mutually exclusive projects for increasing production efficiency. The firm plans to use a 14% cost of capital to evaluate these equal-risk projects. The initial investment and annual cash inflows over the life of each project are shown in the following table.

Portland Products is considering the purchase of one of three

a. Calculate the NPV for each project over its life. Rank the projects in descending order on the basis of NPV.
b. Use the annualized net present value (ANPV) approach to evaluate and rank the projects in descending order on the basis of ANPV.
c. Compare and contrast your findings in parts a and b. Which project would you recommend that the firm purchase?Why?

Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
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Project Y $52,000 Cash inflows (CF) $28,000 38,000 Project X Project Z Initial investment (CFo) $78,000 S66,000 Ycar (t) $17,000 25,000 33,000 41,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 4

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a Project X CF 0 78000 CF 1 17000 CF 2 25000 CF 3 33000 CF 4 41000 Set I 14 Sol...View the full answer


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NPV stands for \"Net Present Value,\" which is a financial concept used to determine the value of an investment or project. It measures the difference between the present value of cash inflows and the present value of cash outflows over a given period of time, using a specific discount rate. To calculate the NPV of an investment, you need to first estimate the cash inflows and outflows associated with the investment, and then discount them back to their present values using a discount rate. The discount rate represents the cost of capital or the expected rate of return required by investors. The formula for calculating NPV is: NPV = sum of (cash inflows / (1 + discount rate)^t) - sum of (cash outflows / (1 + discount rate)^t) Where: Cash inflows: the expected cash received from the investment Cash outflows: the expected cash paid out for the investment Discount rate: the required rate of return or the cost of capital t: the time period in which the cash flow occurs If the NPV is positive, it means that the investment is expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a good investment. If the NPV is negative, it means that the investment is not expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a bad investment.

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